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Underperform on Allegheny

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We are maintaining our Underperform recommendation on Allegheny Technologies (ATI - Free Report) following its lackluster second quarter results. Earnings of 50 cents a share missed the Zacks Consensus Estimate of 54 cents. Revenues rose modestly to $1,357.4 million, also falling behind the Zacks Consensus Estimate of $1,371 million.

The Pennsylvania-based company saw a roughly 12% decline in its profit as sluggish growth across the U.S. and China, along with fragile economic conditions in Europe, hurt the demand for its products in the quarter.

Allegheny anticipates its third quarter sales and volume to be impacted by seasonal slowdowns. Nevertheless, it envisions strong growth in its key end markets including aerospace, oil and gas and electrical energy.

Allegheny, which competes with Carpenter Technology Corp. (CRS - Free Report) among others, is one of the world’s largest and most diverse specialty metals companies. It is a significant supplier to commercial aircraft engine manufacturers and is also expanding its footprint in the commercial airframes market.

Allegheny is expected to benefit from its new alloys and products, diversified global growth markets, differentiated product mix and healthy demand across aerospace, oil, electrical energy, gas/chemical process and medical industries.

However, the company is contending with a soft economy and raw material cost pressures. Moreover, reduced raw material surcharges and low base prices of standard stainless products are affecting the results of its key Flat-Rolled Products division. Revenues from this segment sagged nearly 10% in the second quarter.

Demand for the company’s standard stainless products has been hurt by rapidly falling raw material surcharges, resulting in customers delaying purchases. In addition, the same factors appear to be influencing short-term demand for some high-value products from some key end-markets as many customers are being cautious and keeping inventories lean.

Moreover, the soft U.S. and European economies remain as overhangs. The company expects its revenues and earnings to decline in the third quarter given the macroeconomic headwinds.

Our recommendation on Allegheny is supported by a short-term Zacks #5 Rank (Strong Sell).

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